Fonterra Raises Milk Payout Forecast as Global Supply Slows

World’s largest dairy exporter cites slowing production in Europe and China and a weaker New Zealand dollar.

Tracy Withers

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its forecast payment to farmer suppliers, citing slowing production in Europe and China and a weaker New Zealand dollar.

Farmers will receive NZ$7.50 ($5.99) per kilogram of milk solids in the year ending May 31, Auckland-based Fonterra said in a statement. That compares with an initial May 29 estimate of NZ$7 and last year’s distribution of NZ$5.80. (Editor's note: That $5.99/kg price for milk solids translates to about $22/cwt.)

"At the beginning of this season our forecast was that dairy commodity prices would continue at or near current levels until the fourth quarter," Chairman John Wilson said in the statement. "Supply constraints in Europe and China during the Northern Hemisphere spring have contributed to an increase in dairy prices of 3 percent over the past two months."

Payments to Fonterra’s 10,500 farmer suppliers will also be boosted by the New Zealand dollar’s 6.7 percent slide in the past three months, the company said. Rising farm incomes and higher returns from exports will add to growth in New Zealand’s NZ$211 billion economy.

"2013-14 is shaping up as a bumper dairy season," Nathan Penny, an economist at Westpac Banking Corp. in Auckland, said in an e-mailed note. The lift in milk prices from last year combined with a possible 5 percent rebound in production would boost the economy by about NZ$3.4 billion, or 1.6 percent of nominal GDP, he said.

Dividend Forecast

New Zealand’s dollar was little changed after Fonterra’s announcement. It bought 79.82 U.S. cents at 5:20 p.m. in Wellington.

Fonterra also forecast it will pay a 2013-14 dividend of 32 cents a share, matching its projected 2012-13 distribution.

"During the first half we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins," Chief Executive Officer Theo Spierings said.

Shares of the Fonterra Shareholders’ Fund, which are backed by the dividend flows and earnings of the cooperative, fell 2.5 percent to NZ$7.30 at the 5 p.m. market close in Wellington.